Market Cool On Bhartiya International Limited's (NSE:BIL) Earnings

With a price-to-earnings (or "P/E") ratio of 8.2x Bhartiya International Limited (NSE:BIL) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 13x and even P/E's higher than 30x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

The recent earnings growth at Bhartiya International would have to be considered satisfactory if not spectacular. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Bhartiya International

Does Bhartiya International Have A Relatively High Or Low P/E For Its Industry?

An inspection of average P/E's throughout Bhartiya International's industry may help to explain its low P/E ratio. The image below shows that the Luxury industry as a whole also has a P/E ratio lower than the market. So this certainly goes a fair way towards explaining the company's ratio right now. Ordinarily, the majority of companies' P/E's would be compressed by the general conditions within the Luxury industry. However, what is happening on the company's own income statement is the most important factor to its P/E.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Bhartiya International will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Bhartiya International's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 7.3%. EPS has also lifted 13% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Comparing that to the market, which is predicted to shrink 6.7% in the next 12 months, the company's positive momentum based on recent medium-term earnings results is a bright spot for the moment.

With this information, we find it very odd that Bhartiya International is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Bhartiya International's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Bhartiya International currently trades on a much lower than expected P/E since its recent three-year earnings growth is beating forecasts for a struggling market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. One major risk is whether its earnings trajectory can keep outperforming under these tough market conditions. It appears many are indeed anticipating earnings instability, because this relative performance should normally provide a boost to the share price.

Having said that, be aware Bhartiya International is showing 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored.

You might be able to find a better investment than Bhartiya International. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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